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Equifax: Canadian Households Are Already Having Trouble Dealing With Credit

One of the world’s largest credit agencies is noting credit exhaustion at Canadian households. Equifax is seeing a declining number of Canadians paying off the balance on credit cards. Total nothing burger to most, but it’s actually really interesting to credit nerds. Carrying a balance increases the odds of credit delinquencies later down the road. Consequently, the agency believes they’ll be seeing a “modest” increase in delinquencies soon.

Equi-who, Says What? Why You Should Care

The credit cycle is an important aspect of the business cycle, and therefore asset prices. When credit exits the expansion phase, it moves into the downturn phase. Equifax, one of the world’s largest credit agency, is particularly well positioned to see the signs of slowing credit growth, and early signs of a downturn.

A downturn doesn’t necessarily mean the end of the world as we know it. However, unemployment rises, and the financing of large assets (like homes) slows. Typically this is when big business begins to note the signs, and prepare for a downturn. “Oh no, who could have predicted this?” Well, organizations like Equifax could do a good job. Lucky for us, they’re willing to share their observations on a potential flag.

Lowest Levels of Delinquencies Since The Great Recession

Currently, things are looking pretty good on the surface. The number of 90 day delinquencies has dropped to 1.08% across Canada, down 1.15% from 2017. Regina Malina, Director of Decision Insights at Equifax Canada, noted “overall credit performance in Canada remains incredibly strong,” and “credit had returned to healthier, more sustainable levels.” This is the lowest levels Canada has seen since 2009, which sounds fantastic, but as always there’s a catch. Typically when good things have peaked, there’s more potential downside than upside. Here’s the problem.

Canadian Credit Delinquencies Q1 2018

The percent of non-mortgage credit delinquencies that occurred in Canada, by region in Q1 2018.

Source: Equifax. Better Dwelling.

Canadian Households Feel The Pinch of Higher Interest Rates

Data from the credit agency shows less Canadians are paying off their balance in full. The number of households paying off the full balance of their credit cards peaks at 59% in June 2017, a month before an interest rate hike. That number has since tapered down to 56% at the end of March 2018, a 5.08% decline. Malia commented “The proportion of consumers paying their credit card balances in full each month has dropped recently. As unemployment holds at current levels and interest rates are likely to rise, we suspect delinquency rates to move modestly higher by year-end.”

Canadians That Pay Off Their Credit Card

The percent of Canadians that pay off the full balance of their credit cards.

Source: Equifax. Better Dwelling.

Carrying A Balance Is A Warning Flag

Households that carry a balance are more likely to miss future payments entirely. People that regularly pay their balance in full represent less than 10% of people that miss 2 or more payments. To contrast, those that normally make the minimum payment represent over 50% of those that miss 2 or more payments. As more households begin to stop paying off their cards in full, the odds of more delinquencies increases.

Customers That Miss Payments

The percent of customers that miss 2 or more credit payments, based on how much of their balance they typically pay.

Source: Bank of Canada. Better Dwelling.

The Bank of Canada expects a 6 to 12 month lag on the full impact of interest rate hikes. That means we may not have even seen the full impact of the mild hikes over the past year. Despite that, the BoC expects the economy to push into a neutral policy rate, which would be somewhere between 2 and 3%.

Editor’s note: Have any credit questions for Equifax’s Director of Decision Insights at Equifax Canada, Regina Malina? Drop them in the comments below, and we’ll forward the best ones to her.

38 Comments

COMMENT POLICY:We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

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I am surprised actually. Less than 10% pay their balance in full every month? I just can’t believe in it, I trust BD analytics but my mind just can’t accept this information yet. And that’s for Vancouver & Toronto only? Nope, that’s for the whole Canada where RE is not so overvalued.

What is the interest on credit card? 20-25%? Unless you are desperate I can’t imagine why anyone would roll over balance. There are HELOCs, Line of credits which can give you much better rate if you are desperately need to borrow.

Maybe I don’t understand something and it was like this before, maybe average balance is like $10 so it doesn’t really matter but would be interesting to see that info published as well along with how those stats changed over time.

I think you read it wrong Xelan. “People that regularly pay their balance in full represent less than 10% of people that miss 2 or more payments.” I think it’s saying if you look at the people who, at some point, will miss 2 or more payments, only 10% of them regularly pay their balance. In other words, if more people are not paying their balance in full, there’s more chance that more people will eventually miss entire payments.

I believe this behaviour was addressed directly in a BD article or via someone like Grizz/AM/Joe. After 2008 analysts looked at what the heck happened and found many people, I’m talking the good people, who just wanted to keep their house for their family, ended up using their credit cards to cover basically their entire life while the vast majority of their income was doing to debt. There was nothing left over to pay even the minimum and it just kept racking up until 20% interest rates choked off everything. The belief was that the market would rebound and make up the heavy carrying losses. People do whatever they can to shield themselves from losing their biggest asset and any equity they have. Houses represent more than an asset; a house where you raise your family, make memories,plant roots and live your life. That’s why this is a kick in the nuts. Canadians weren’t sucked into subprime like the US (though we did descend into it). We had a ton of equity and good jobs. What had to happen to strip us of our wealth was a bubble. Everyone was telling us ‘this is the new normal’ and why would we question them? Happy Birthday Canada. Tick tock.

Probably a thought process of something like “I can increase the total amount of debt on my property each yeah by 8% because the value of it will go up by 10%…….. That’s a 2% gain! Plus I have financial freedom now”

I personally think there will more correction coming, but the same “bubble burst” rhetoric has been around for the past couple decades.. my mom just bought her 6th home this year.. her friend, who has been waiting on the side line for the past 10 years is not happy lol.

Doug Hoyes, one of the biggest insolvency trustees in Ontario, said he’s seeing people using their HELOCs to pay off credit cards as well. The expansion phase is over, balance your portfolio and pray for your neighbors.

Maybe jumping the gun a bit here, and not sure how many of those people who are starting to fall behind also own property, BUT is this maybe a sign that a group of people have maxed out their HELOC borrowing capacity and/or the banks have started to reign in the HELOC taps?

The old play was to move credit card debt over to your HELOC. Feel like a financial genius because you just went from paying 20-25% interest to 3-4%, and now your card is free to go max out again.

You would have to assume that any homeowners with equity (and a HELOC) would continue to do this rather then carry it on a higher interest rate instrument……………………… Time will tell

I’m just curious about something and wondering if someone knows the answer . What would the average house price in Canada be if there were no credit or mortgage business ? I mean if everybody were to buy in cash 100% and mortgages never existed? I personally guess it would be less than half what it is today. What’s your guess? Note: I’m not saying there should never have been any credit business. Maybe credit is good for the economy as a whole but just curious what the numbers would be.

Economics in the pure form consider only wges, rent and profit . All other forms incomes are accounting practices to show profit. We are missguided by the businesses with vested interest. Purpose of the house was for consumption, but when consider it as a investment we always over consume . If there are no credit then price of the home will be land price +construction price +20% profit will be the price

You may also calculate the price of the home in gold standard as well In 1996 i.e end of the last bear market A Toronto detached home was sold at 300000 . Gold price at that point in time was 375 per ounce , in gold standard the home price was 800 ounce. Even today you will get home for the same gold price Today’s gold rate is 1250, and 800 ounce price is 1 million In nut shell home price is not increasing as per gold standard

Great read…site is dry and doesn’t do any job of ‘connecting dots’ so could be of little value to many but the opinions expressed are grounded in economy theory and fundamentals. A lot of ‘reading between the lines’ but I find the articles get me thinking and then I explore.

The Parable of the Fruit Trees It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.

Good read. Apply that to record home prices paired with record low interest rates, a large increase in the money supply which is now reversing (FED and China), and a regulatory environment that caused a ton of that money to flow into GVA and GTA properties (money laundering, QIIP,)…………………. NVM what could go wrong

The only reason delinquancies are low is because everyone has a 200K line of credit they use as an ATM. Those credit lines’ payments are going up, and house prices are going down. The perfect storm where banks call in those lines due to a lack of equity is what we are witnessing play out.

When the federal govt made bail in’s legal a few years ago, it wasn’t for no reason. They know exactly what’s coming because they’re orchestrating it, along with the banks and central bank

Once credit cards aren’t being paid off, the balance increases every month much faster than most people anticipate. A combination of being unable to adjust spending habits, and principal+interest becoming a deeper hole every month. Increasing CC debt + maxed out HELOC + less liquid housing market is a really bad combination for people that are overleveraged.

As a sidenote, does anyone know why there are no options available on $EQB (Equitable bank) stock?

Okay, I have a few questions. A one percent drop is perhaps not really comprehendable, in terms of ‘crisis mode’. But what does it translate into in raw numbers? How many actual people are we talking about? Thousands? Tens of thousands? Hundreds of thousands?

Second question, we are all familiar with the ‘two year no interest equal pay’ plans offered by some retailers on their credit cards. These make a lot of sense, as it amounts to ‘free money’. Rather than pay off the balance, put it in the bank. Okay, not when bank accounts paid like .01% interest, but now when TFSA’s are up to 3%, it makes sense. You are ‘richer’ by NOT paying off a zero interest balance and earning money on the money instead. How much of this ‘carrying a balance’ increase is due to more balances being carried on these ‘two year no interest’ schemes?

Third question, I have noticed lately that there is a lot of credit card promotions going on, lately. The big companies are pushing their ‘cash back’ cards. With good reason. Debit cards were eating into their territory. Retailers pay far less in fees on debit transactions than on credit card transactions. Encouraging the consumer to use credit cards instead of debit cards, by paying them to use the credit card, increases the fees they get from retailers. So the lure to the consumer is there – buy with your credit card, get paid for doing so. But of course, the more payments that ar switched from debit cars to credit cards, the more the consumer is lured into saving money by spending money they ain’t got. How do you factor this in to the numbers?

Fourth question, related to the last, relates to weather or not the volume of money put on credit cards is going up, or staying the same? It is a very different economic scenario if credit volume stays the same with fewer consumers paying it off, or if the credit volume is increasing, more purchases are being made by credit than by cash, and in the process more balances are being carried.

More data is needed to make any sense of this. Analyzing it in isolation is just pure speculation.

Actually I was thinking about those stats for a while and came up with an advice for my subscribers. I’ll provide it to you as well because I feel it’s really important right now.

“If anyone was thinking/planning to sell assignment in GTA or GV I would advise you to start monitoring it very closely and consider making decision. Buyers are quickly disappearing from that sector so liquidity is drying out. For detached segment it may be already too late.”

Same also applies to flippers because flippers and pre-construction buyers “make bets” on future RE prices with their decisions. Pre-construction segment always goes down first when investors starting to lose confidence in future outlook of RE market. It’s clearly happening right now.

Nobody can tell if it’s a temporary dip in confidence or beginning of something bigger, you have to make this decision yourself and if it’s indeed beginning of something bigger time is running against you.

Also, here is the voice of reason from the media regarding interest rates normalization.

Title: The Bank of Canada will raise rates in July — and Canada will be fine. “The process of normalizing rates was always going to hurt consumers’ wallets – and like dieting, there’s never a perfect time to start. But it’s time we accept that higher rates are part of a healthy economic routine and get ready to tighten our belts – ever so slightly.”

Psychologically, a soft landing may produce more turmoil than a hard landing.

In a hard landing, people get poorer very drastically and very quickly, but they also start the recovery process almost immediately. Things start to get better, and noticeably better. When you are in the gutter, getting to the curb is a great improvement. It makes you feel really, really good – as if things are improving.

In a soft landing, you never get to the gutter, never even reach the curb. But you are stuck at whatever level you are on for a very long time. No noticeable improvement at all.

So even though you are far above the curb, it FEELS worse than if you hit the gutter and climbed only as far as the curb.

People would rather be poor, but getting less poor, than be rich, but not getting any richer. Stagnation is far worse than climbing back up.

People get bananas cuckoo crazy when things, no matter how good, are not getting better.

If I were into conspiracy theories, i would suggest that it was written by some Russian propagandist that was hoping to demoralize the Canadian population the way they did to the American population in order to get trump elected.

It is full of pure, unadulterated tripe.

Even suggesting that ‘billions’ have been laundered through casinos, when their entire cash flow does not support anything even close to billions, is absurd.

American companies are living and surviving on credit and cheap money, NOT on ‘good economic fundamentals’.

And they are using this credit to buy back their own stock, to pay out dividends, and to buy market share (other competitors).

If American corporations end up in a cash flow tightening, and if US interest rates keep going up, the bulk of American corporations are at severe risk of having their loans called, and in seeking bankruptcy protection.

This is not just the Big Three auto companies, like it was in the ‘great recession’, but almost EVERY major American corporation.

And remember, when a company goes bankrupt, it’s stock value does not just drop, it disappears. The entire value is wiped out. Hundreds of billions of dollars of exuberant money, just vanishes.

And this when the US treasury is facing trillion dollar a year deficits.

Talk about being vulnerable to a credit crunch and interest rate increases.